Spend more than a few minutes in a conversation with someone in the CPG (consumer packaged goods) industry and you will almost inevitably find yourself discussing the spiraling cost of trade promotion.

In Europe, where we’re experiencing a broadly deflationary environment, decent returns on trade promotion spend are increasingly hard to generate. And as questions are raised about how to improve those returns, the answer has tended to be, “well, it depends.”

But “it depends” isn’t much of a navigation beacon.

First, let’s examine trade promotion in Western Europe. We took a look at the markets in Germany, the U.K., France, Italy, Spain, Netherlands, Belgium, Portugal and Austria. Here’s what we found:

Trade promotion is delivering diminishing returns in many categories.

Topline growth by value is now heavily reliant on promotional spend: 24% of sales by value in Western Europe is driven by promotion—yielding growth of just +0.7%. Put another way, increased levels of promotion as simply sustaining rather than increasing category value.

Volume growth is flat or declining in many categories.

(We note that many of these trends appear to apply to most Eastern European markets too. For example, in the Czech Republic, roughly one-third of all products are sold on promotion.)

All of this is happening in a setting where the euro is weak, economies across the region are (mostly) soft and, in big markets such as Italy and France, consumer confidence levels remain in the doldrums. Where there is growth, it is in a limited number of “super-categories”—beverages (alcoholic and non-alcoholic), snacks and personal care. More generally, in highly expandable categories, such as beer and confectionery, promotion still has a strong influence on driving value sales growth. It is in the many categories in which promotion delivers little-to-no positive influence on sales growth that solutions are required.

Indeed, in some categories, there has been an increase in promotional spend and category growth has still fallen. You have to spend money to make money, as they say—but right now, there are places where companies are spending money to lose money.

What is to be done?

The general structure of trade promotion expenditure means that many (although not all) manufacturers will spend 100% of their trade promotion budget each year.

We think it’s time to change this expectation. Those who manage trade promotion budgets should abandon the presumption that they will and should spend 100% of their budgets. Instead, companies might require that the desired spend be earned on the merits through the year. Say, for instance, that a company encountered an unexpected opportunity to launch an innovative product quickly on the basis of newly identified demand. It should be able to draw on monies for such a purpose—but spend thereafter would depend on performance. Similarly, companies would adjust above-the-line spend and certain other major line items budgeted for a given product or portfolio throughout the year based on the ROI of spend used until that point. Suddenly, you have a growth pool rather than a guaranteed expense.

Changing the structure to have a “pool” of budget that could be used to double down on big bets—and that would be withdrawn from low-performing promotion—would make cross-business leadership teams much more accountable in their spending. It is also a cost-neutral move.

How would this work, precisely? Each team would begin with its usual operating budget, minus a percentage placed in the growth pool—and access to the cross-team growth pool for sufficiently compelling opportunities. In addition, we recommend that teams be required to take a few short “promotion vacations,” during which the money that’s normally spent on promotion would drop straight to the bottom line.

We all know that market share pressure often outstrips the desire to reduce promotion spend. As a consequence, the endless cycle of seeking to win over new (low-profit) customers has become all but set in stone in some categories. That doesn’t make it a smart move. Promotion spend will continue to increase until companies accept that they must be willing to suffer volume loss in exchange for improved profitability over the long term. Indeed, today’s model implies a relationship between market share and profitability that does not necessarily hold. Those customers that companies work so hard to convert with promotions cost more to win on each cycle—and, in doing so, companies are training them to wait for promotions, and look only at price.

Companies should design fewer, smaller, better promotions rather than more, bigger ones. Optimizing spend—how much is spent and how—will deliver better returns. Focusing promotions on the most profitable outlets will be critical.

This approach can also be aligned with existing efforts to remove overlapping SKUs and simplify the experience for consumers as they walk down the shopping aisle. Less is undoubtedly more.

There are, of course, complications to implementing changes of this kind, due to structures other than budgeting—compensation is an obvious one. Crucially, doing this would also require a retailer-outreach effort to ensure support on the shelf isn’t lost.

This may be difficult. However, not finding a way to make a change of this kind will virtually guarantee that trade promotion budgets continue to be spent for diminishing returns.

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